If you’re having trouble choosing the type of company you want to incorporate in Denmark, the first question you should ask yourself is whether or not you’d rather run a business where you’re personally liable, or you’d prefer to place that liability in a structure, known as a limited liability company.
Dania Accounting would advise that, first and foremost, you consider the details of your prospective company and the risks involved. What will your business actually do, and who are your clients? Will there be any potential liabilities? Are you starting your operation with a good deal of cash in the bank? Knowing the answers to these questions will help you decide between a sole proprietorship, an IVS, or an ApS.
In Denmark, the easiest company to incorporate is a sole proprietorship, called “enkeltmandsvirksomhed” in Danish. When deciding between a sole proprietorship and a limited liability company, you must take into account how much money you have and the type of clients you have. If you don’t have much money and are in a situation where there’s not much liability with your potential startup, then a sole proprietorship may be your best option, because it’s very easy to start. You can register it for free within a few days. You might need to pay for an auditor to help you with the process, but otherwise, it’s quick, easy, and cheap. No requirements in terms of equity; no need to deposit any money into the bank account, as is required with most of the limited liability companies.
Another benefit of choosing a sole proprietorship is that it allows you the opportunity to use other incomes to offset the inevitable deficit of starting your business. Some people make a revenue from the beginning, but most businesses have a deficit for 1-3 years or even more; so, with a sole proprietorship, if you have a job in the beginning, and you’re working full-time for six months while starting the business on the side, then the deficit produced by your company can be used as a tax deduction for your employee income. In this way, you’ll benefit a lot from your tax refund in your first year of business.
The following example will illustrate this benefit: Tax in Denmark is normally 35-45%, but as a good rule of thumb, we’ll say 50%. So imagine you have a deficit the first year of 100.000 DKK, and you have a job alongside running your business, for which you make a salary of 200.000 DKK. In this case, you have 200.000 DKK in salary, and you lost 100.000 DKK in your own business, due to all the startup costs. When you calculate your tax at the end of the year, you’d have a salary of 200.000 DKK and, from that amount, you can offset the deficit from your own company. When the tax office calculates your income, it will be 200.000 DKK minus the 100.000 DKK from your deficit, so you would only have to pay tax on 100.000 DKK. If the tax is around 50%, then the tax would be 50.000 DKK. In this way, you can actually make use of the deficit. So if you expect a big deficit and you’re low on cash, a sole proprietorship is a really good idea.
One disadvantage with sole proprietorships is that you are more or less the company, and you’re liable for everything that might happen during the lifetime of the business. This means you could, for instance, be sued by a client or end up in a lawsuit if you fail to pay your bills. If you lose the lawsuit, then you’d be held personally liable. Worst-case scenario, you might end up in a situation where you’d need to sell your house in order to pay some obligation. So having a small company, a sole proprietorship, is in many ways easier than the limited liability companies, but you must understand the risk involved.
So when is a sole proprietorship a good choice in terms of risk? Let’s consider the following example: If your business involves writing articles for friends, family, and close acquaintances, then you’re not likely to end up in any huge lawsuits. And since your costs would be limited to a computer, paper, pen, etc., your overall risk would be limited.
However, if you then scale up your company to include two or three full-time employees, then you’d have a liability towards them in terms of salaries, as well as if something goes wrong. Moreover, if you acquire some big business which, for instance, results in sales of 1 million DKK per month, but you decide to source the work out and pay your outsourcing partners 900.000 DKK, in this scenario, your margin would not be great. Your profit wouldn’t be a million; it would be much less. But you would have provided the client a service for 1 million DKK, resulting in a big liability.
One way to avoid such big liabilities is to write your way out of them with a contract. In reality, you cannot sign a contract with zero liability; some kind of liability – an amount or percentage – will always need to be incorporated. We at Dania Accounting suggest that you look at your competition to see what they negotiate in their contracts or seek advice from a lawyer to stay competitive.
To sum up, if you’re starting out with little money and don’t have big risks, a sole proprietorship may be the best choice. Although you can make a limited liability company quite cheap in terms of equity capital, you should still keep in mind whether or not there’s a deficit.
When comparing limited liability companies to a sole proprietorship, first ask yourself if there’s any liability in the work you do. Look at your worst-case scenarios. If you have a disagreement with a client – for instance, you did some bad work, and they lost some money – you must ask yourself if you can write your way out of the liability in a contract that will potentially hold up in court. If you can, then the liability will be limited, and a sole proprietorship is the quickest and easiest option to starting up your business. If you can’t, you’re going to be choosing between one of two limited liability companies.
These two types of limited liability companies available in Denmark are called IVS and ApS. Additionally, there’s a large form called A/S, but a half million in equity is required to apply, so most companies going the limited liability route will be choosing between IVS and ApS.
Pro: ApS provides peace of mind for clients
Con: ApS requires 50.000 DKK to start
If you have a lot of money in the bank – like, say, 50.000 DKK – then the ApS might be your first choice. The ApS is an old institution; it’s a type of limited liability company that’s been around for ages. Everybody knows it, and everybody feels safe with a company name that’s an ApS. So choosing an ApS might make you seem more reliable to potential clients or business partners. But you must have 50.000 DKK in equity capital to start the business.
You might choose an IVS over a sole proprietorship, if you don’t expect to have a huge deficit, and you want the limited liability from the beginning. An IVS is a newer option than the APS, and it’s a good alternative if you want to have limited liability but don’t have 50.000 DKK in the bank. You can start an IVS with 1 DKK, and you can establish it yourself online or find a company that will do it for you, with the going rate being somewhere in the range of 600-700 DKK.
Now, the biggest difference between an IVS and an APS is that, while a traditional ApS necessitates a normal capital requirement of 50.000 DKK, all the requirements for the equity capital are already established when you start an IVS company. Basically, all you need is a single Danish Krone to get your company off the ground, with a second requirement stipulating that 25% of your annual revenue must be saved, until you’ve acquired a reserve of 50.000 DKK.
The equity capital for the IVS can be anywhere from 1-49.999 DKK. Whatever the amount you start with for capital, you must save 25% of your revenue until you’ve deposited 50.000 DKK. You can then change the type of the company to an ApS if you wish, or it can remain an IVS. The rules that regulate IVS’s are more or less the same as those that regulate ApS’s, so the main benefit with an IVS is the capital requirement.
It’s very tempting to start with 1 DKK, but you should keep in mind that if you spend more than 50% of the equity then you must have a shareholder meeting to develop a plan to reestablish the equity. This is a rule. So when you spend your 1 kr on the first day – paying for the lawyer, the auditor, the people around you who are assisting you in the process – you’ll be required to have a shareholder meeting. Instead, consider looking at your estimated costs for the first one or two weeks of the business – auditor, lawyer, etc. – and multiply the estimate by two. This should be the equity. For example, if you have 5.000 DKK in costs for establishing the IVS, then you should declare at least 10.000 DKK as equity, because this is around 50% of your projected costs.
A limited liability company works differently than a sole proprietorship in that, even if there is a deficit, that deficit is isolated in the limited entity, so you can’t lose that deficit for anything. If you receive a salary from your limited liability company to pay your bills, then the company would be required to produce a payslip for you. And once that payslip is made, the company must withhold taxes and pay taxes to the government. So if you have a deficit and you also need a salary, because you have bills to pay, not only have you lost the money on the deficit, but you must also pay taxes on this personal income.
If you don’t have a huge deficit, if you already have some clients, and you can see from day one that you’re going to break even or make money, you should definitely look at starting with a limited liability company.
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